Adobe 2003 Annual Report Download - page 90

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90
liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are
reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice
of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently
unpredictable. However, Adobe believes that it has valid defenses with respect to the legal matters pending
against it.
Note 15. Financial Instruments
Fair Value of Financial Instruments
In accordance with Statement of Financial Accounting Standards No. 133 (“SFAS 133”), “Accounting
for Derivative Instruments and Hedging Activities,” we recognize derivative instruments and hedging
activities as either assets or liabilities on the balance sheet and measure them at fair value. Gains and losses
resulting from changes in fair value are accounted for depending on the use of the derivative and whether it
is designated and qualifies for hedge accounting.
As of November 28, 2003, our cash equivalents, short-term investments, and marketable equity
securities, are carried at fair value, based on quoted market prices for these or similar investments. For
further information, see Note 3.
Our portfolio of investments, which includes our direct investments, as well as indirect investments
through Adobe Ventures, is included in other assets on our Consolidated Balance Sheet. For further
information, see Note 6.
Foreign Currency Hedging Instruments
We transact business in foreign countries, in U.S. dollars as well as various foreign currencies. In
Europe and Japan, those transactions that are denominated in euro or yen subject us to exposure from
movements in foreign currency exchange rates. This exposure is primarily related to yen-denominated
product and support revenue in Japan and euro-denominated product and support revenue in certain
European countries. In fiscal 2003 and 2002, our exposures were 21.3 billion yen and 20.5 billion yen,
respectively. In fiscal 2003 and 2002, our exposures were 274.0 million euros and 288.5 million euros,
respectively.
In addition we also have long term investment exposures consisting of the capitalization and retained
earnings in our non-USD functional foreign subsidiaries. For the fiscal years ending November 28, 2003
and November 29, 2002 this long term investment exposure totaled a notional equivalent of $30.8 million
and $33.9 million, respectively. At this time we do not hedge these long term investment exposures.
Our Japanese operating expenses are in yen, and our European operating expenses are primarily in
euro, which mitigates a portion of the exposure related to yen and euro denominated product revenue. In
addition, we hedge firmly committed transactions using forward contracts. These contracts do subject us to
risk of accounting gains and losses; however, the gains and losses on these contracts largely offset gains
and losses on the assets, liabilities and transactions being hedged. We also hedge a percentage of forecasted
international revenue with forward and purchased option contracts. Our revenue hedging policy is designed
to reduce the negative impact on our forecasted revenue due to foreign currency exchange rate movements.
At November 28, 2003, total outstanding contracts included the notional equivalent of $191.5 million in
foreign currency forward exchange contracts and purchased put option contracts with a notional value of
$112.4 million. As of November 28, 2003, all contracts were set to expire at various times through April
2004. The bank counterparties in these contracts expose us to credit-related losses in the event of their
nonperformance. However, to mitigate that risk we only contract with counterparties with specific
minimum rating requirements. In addition, our hedging policy establishes maximum limits for each
counterparty.
Economic Hedging – Hedges of Forecasted Transactions
We use option and forward foreign exchange contracts to hedge certain operational ("cash flow")
exposures resulting from changes in foreign currency exchange rates. These foreign exchange contracts,
carried at fair value, may have maturities between one and twelve months. Such cash flow exposures result
from portions of our forecasted revenues denominated in currencies other than the U.S. dollar, primarily the